KUALA LUMPUR: The International Monetary Fund (IMF) has warned Malaysia to watch out for spill-over risks from global financial stresses due to the country’s high public sector and household debt levels.
Although the debt ratio to GDP is likely to decline, household debt remains relatively high, IMF said in its report following the annual Article IV Consultation with Malaysia.
The Malaysian economy has adjusted well to lower global oil prices, but continued low commodity prices have posed challenges to fiscal consolidation plans.
Malaysia’s diversified economy, along with exchange rate flexibility, has buffered the real economy from the commodity price shock, while deep financial markets have helped absorb global financial market volatility.
"Risks of a severe downturn in the financial cycle appear to be low, mainly due to a resilient banking system and Bank Negara Malaysia (BNM)’s prudent policies and oversight," said the head of the mission, Daisaku Kihara, after a visit to Putrajaya and Kuala Lumpur from Nov 30 to Dec 14.
Kihara said the plan to gradually consolidate the country’s fiscal position over the medium-term will help bolster resilience and is appropriate.
"Consolidation will also help alleviate risks from elevated contingent liabilities, "he said, adding that the pace of consolidation should reflect economic conditions.
The 2017 Budget, envisaging a deficit of 3.0 per cent of GDP, has estimated that federal government debt will remain below 55 per cent of GDP.
Kihara's team also found the current monetary policy stance as appropriate in the baseline scenario of moderate growth, low inflation, and external uncertainties.
"Exchange rate flexibility has played a key role in helping the economy to adjust to a series of external shocks and should remain the first line of defence."
Consultation and communication with market participants should continue to help maintain investor confidence and orderly functioning of the foreign exchange market, IMF advised.
The team, on its annual Article IV Consultation visit, will present the report to the Fund's Executive Board for discussion in March 2017.
It concluded that the Malaysian economy will continue to perform well, despite significant headwinds.
Real GDP growth is projected at 4.2 per cent for 2016, underpinned by resilient domestic demand and projected to increase to around 4.5 per cent in 2017.
Over the medium term, potential economic growth is expected to be between 4.5 and 5 per cent.